One of the most frequent questions I receive from my clients, friends, and attorneys outside of the state of Nevada is “What is an asset protection trust?” Asset protection trusts have become the hottest estate planning topic of late, and they can be an effective component of an estate plan if formed and used properly.
In general terms, an “asset protection trust” or “spendthrift” trust is a trust that prohibits a beneficiary or the creditors of a beneficiary from reaching assets of the Trust in a manner contrary to the Trust’s terms. A “self-settled” spendthrift trust is a trust where the person creating the Trust and contributing his or her assets to the Trust (the Grantor) is also a beneficiary of the Trust. Simply put, this means that I can create a Trust for my benefit while receiving asset protection from my creditors.
Nevada is one of fourteen states that allow and recognize self-settled spendthrift trusts. Nevada Asset Protection Trusts have been used effectively as an asset protection vehicle since the spendthrift trust legislation became effective in October 1, 1999. On October 1, 2011, our legislature passed new provisions that further enhanced the spendthrift trust statutes to make these trusts even more attractive. In fact, of the fourteen other states that recognize self-settled trusts, Nevada is one of the most favorable jurisdictions. For this type of Trust to be valid or effective under Nevada law, there are several key elements that must be met under Nevada Revised Statutes (NRS) Chapter 166.
A self-settled Nevada Asset Protection Trust (NAPT) must be an irrevocable trust that was formed in a manner that did not hinder, delay or defraud known creditors. Under our statutes, if you create and fund a NAPT as a result of an impending lawsuit or judgement, the NAPT will not be effective as to that known creditor. Instead, the creditor can ask the Court to “undo” or ignore the NAPT, so the creditor can ultimately reach those assets.
In general, asset protection under the NAPT is established two years after the initial transfer of assets to the NAPT. However, Nevada law makes a distinction between those creditors who were creditors at the time assets were transferred to the NAPT and those creditors who became creditors after assets were transferred to the NAPT. For example, if you have a known creditor at the time that you create and fund a NAPT, asset protection is afforded to you as to the claims of that creditor after the longer of two years from the date of transfer to the NAPT or six months from the date the creditor discovered or should have discovered the transfer. For those creditors who became creditors after the creation and funding of the NAPT, asset protection is afforded to you after two years have passed from the date you funded the NAPT.
As you can see, timing is crucial in establishing and funding a NAPT. It is ideal to establish one well before potential creditor issues arise. Therefore, if you are in a high-liability industry or wish to protect a nest egg, you should explore whether a NAPT is a proper tool for you. The sooner that one is established, the sooner that those assets within the NAPT will be protected from your potential creditors.
Additionally under NRS 166, at least one acting Trustee of the NAPT must be a Nevada resident or a bank or trust company that maintains an office in Nevada. This Nevada Trustee must also perform most administration on behalf of the Trust such as maintaining records or filing tax returns.
Under the terms of the NAPT, the Trustee cannot be required to distribute assets in order to receive the sought-after creditor protection. Instead, the Trustee has complete discretion to distribute income or principal to you or the other beneficiaries of the NAPT.
Although a Nevada Asset Protection Trust is irrevocable, there are a variety of drafting techniques that can provide you flexibility. One of the many techniques is to grant you a veto power. This power allows you to veto a distribution that a Trustee may make to a permissible beneficiary of the NAPT. Another technique is to grant you a testamentary limited power of appointment, which allows you to appoint the remaining assets of the NAPT upon your death to a certain class of beneficiaries like a spouse, descendants, siblings, or charities.
If you are considering whether a NAPT may benefit you, it is important to hire an attorney who understands the nuances of asset protection law, the assets of your estate, your appetite for risk, and your wealth transfer goals. The attorney should have an established practice of working with your other advisors to ensure that your entire team properly addresses the components of your asset protection plan. Finally, because an asset protection plan may add several more components to your existing estate planning documents, your attorney should have excellent communication skills in order to educate you on each document of your plan. After all, you need a clear understanding of not only the framework of your plan but also a practical day-to-day working of your plan so that you can manage it in a manner that optimizes asset protection.